Written by Stephanie Lyon, Regulatory Compliance Counsel
Credit unions generally permit existing members to have more than one share savings and checking account — these are often referred to as subaccounts. Whether opening a new subaccount is considered to be opening a new account is a question the NAFCU Compliance team has received several times since the Customer Due Diligence (CDD) rule was finalized in 2016. This question is relevant because starting May 11th, 2018, any time a legal entity member opens a new account, the credit union will be required to identify and verify the identity of the beneficial owners. See, Final 31 C.F.R. § 1010.230(b)(1).
Unfortunately, FinCEN's CDD rule did not explicitly discuss subaccounts anywhere in the proposed or final rule. However, there are several pieces of information located throughout the preambles to the proposed and final rule as well as guidance documents that seem to indicate opening a subaccount is likely considered to be a new account that will trigger the beneficial ownership identification and verification requirements.
Definitions of Account and New Account
The CDD rule defines a "new account" as "each account opened at a [credit union] by a legal entity customer on or after the applicability date." Final 31 C.F.R. § 1010.230(g). The rule also defines "account" by cross referencing section 1020.100(a) which implements the Customer Identification Program (CIP) requirements, among other things. Under CIP, an "account" means "a formal banking relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit." FinCEN and other regulators provided an interpretation of the definition of account that is helpful to determine whether a subaccount could be a new account.
In the Interagency Interpretative Guidance on Customer Identification Program Requirements, FinCEN made it clear that CIP does not have to be performed when an existing "customer" renews a loan or rolls over a share certificate as long as the credit union has a reasonable belief that it knows the true identity of the member. See, 31 C.F.R. § 103.121(a)(3)(ii)(C) – Person with an existing account, Q1. However, that same guidance stated that "[f]or the purposes of CIP, each time a loan is renewed or a [share certificate] is rolled over, the [credit union] establishes another formal banking relationship and a new account is established."
From the guidance and the definitions of account and new account, it does appear that opening a subaccount will be considered forming a new formal banking relationship and require the identification and verification of beneficial owners. But while this guidance is significant in explaining how FinCEN views an existing account and a new account for CIP purposes, it is not fully indicative of whether a subaccount is considered to be a new account for CDD purposes so we have to turn to the actual rule.
Preamble to Proposed and Final CDD Rule
In the proposed rule, there is a footnote that talks about the types of new accounts the rule would affect. The footnote seems to indicate FinCEN did not want to create a blanket exemption from the requirement to collect beneficial ownership information for subaccounts opened by a legal entity member after the compliance deadline. The discussion of this footnote was further explained in the preamble to the final rule in which FinCEN seems to strike a balance between requiring beneficial owner information for subaccounts opened after the compliance deadline and not retroactively requiring the collection of this information for accounts opened before the compliance deadline. Here is a relevant excerpt:
Several commenters sought clarification as to whether a financial institution must identify and verify a legal entity customer's beneficial owners each time it opens a new account at the institution after the rule's compliance deadline, or whether the requirement applies only the first time it opens a new account at such institution. FinCEN has concluded that, while it is not requiring periodic updating of the beneficial ownership information of all legal entity customers at specified intervals, the opening of a new account is a relatively convenient and otherwise appropriate occasion to obtain current information regarding a customer's beneficial owners…
81 Fed. Reg. 29406. Both the footnote and several other areas of the preamble make it apparent FinCEN expects credit unions to collect beneficial ownership information whenever an existing legal entity member does something that modifies the account relationship or triggers a review of the account. Additionally, as there is no guidance indicating that subaccounts are exempt from the definition of a new account, it seems FinCEN considers these to be "new accounts" if opened after the compliance deadline.
Finally, remember that other aspects of the CDD rule require credit unions to monitor members and update member information. This applies to currently opened accounts and accounts opened after the compliance deadline. I wrote a blog on triggering events that may be helpful when reviewing legal entity members.
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